March 2020 goes down in history as one of the darkest periods for global financial and stock markets yet. The cryptocurrency market has not been spared either as popular coins like Bitcoin suffered one of their heaviest single day losses to date.
World markets crash
Growing fears that the rapidly spreading Coronavirus is getting out of control are bringing down markets. Major indices suffered heavy losses and in some cases, trading had to be stopped as authorities battle to contain the fallout.
Surprisingly, it is Bitcoin— a digital currency that is governed by a different set of rules—which appears to have incurred the worst losses.
During a certain week in March 2020, it took less than 48 hours for Bitcoin price to drop by some 60% before stabilizing at around $4000.
This seems like a crashing reverse!
Many had been hoping that Bitcoin would, just like gold, act as a safe haven asset in times of crisis. (Gold has managed to maintain a steady value during this period.)
Instead, Bitcoin’s volatility increased sharply and those liquidating their coins in this period suffered steep losses. Bitcoin and the entire crypto market, unlike stocks, do not have circuit breakers that automatically halt trading if certain thresholds are breached.
Bitcoin monetary policy
Ironically, prior to this drop, there had been pressure on Bitcoin price to actually go up because of the expected halving, an event that sees the block reward being reduced.
When Bitcoin was created, it had a preset monetary policy, only 21 million coins will ever be issued and that rewards for miners contributing to the network’s integrity will reduce every four years. The last halving occurred in 2016 when the block reward dropped from 12.5 to the current 6.25 coins per block. The next is scheduled to occur on 20 May 2020
Each halving is seemingly followed by a spike in the value of Bitcoin. Many speculators—who have observed or studied Bitcoin trends— are undeterred by the current turmoil. Some so-called crypto and blockchain experts have continuously issued bullish sentiments about Bitcoin’s prospects in light of this impending halving.
However, prior to this talk of halving, Bitcoin price had been a subject of controversy and increasing scrutiny. But just what drives Bitcoin price swings?
To get a hint of what really happens, one has to go back to the year 2019, when creators of Tether were taken to court over their alleged role in manipulating Bitcoin price.
Such an incident suggests that the cryptocurrency market is still at very early stages of development. The actions of a few players like over the counter (OTC) brokers can have a considerable effect on the entire market.
Bitcoin price vulnerability
This assertion is similarly raised by Chainalysis, a blockchain analysis tech firm that claims to have the technology to trace Bitcoin transactions. In a report, Chainalysis offers ‘evidence’ that appears to corroborate how activities of one Ponzi scheme operating out of China, PlusToken, may have influenced price fluctuations of Bitcoin in the past.
It has become common knowledge to those analyzing cryptocurrency markets that large liquidations generally tend to depress the price of Bitcoin. Some have asked if such PlusToken-related cashouts are dragging down Bitcoin’s price.
PlusToken scammers are alleged to have cashed out at least $185 million worth of stolen Bitcoin via OTC brokers over a short period of time. To try and answer the question above, Chainalysis ran an analysis of Bitcoin’s price in relation to PlusToken cashouts via Huobi OTC brokers.
Indeed, Chainalysis’ findings support this view that PlusToken cashouts actually caused a downward price pressure as the graph below shows.
For example, when cashouts spiked following a $34 million withdrawal sometime in September 2019, Bitcoin price suffered an almost instant drop from around $10 000 to $8000. Prior to this, another event, the shutdown of PlusToken by law enforcement agencies, had been preceded by a spike in cashouts. Again this was followed by a price drop.
Not gold yet
The more recent price drop could again be a result of the activities of a few players cashing out large sums. Just why the cashing out is happening at the same time as stock markets are crushing remains a mystery.
However, it is apparent that Bitcoin may not have fully reached the virtual gold status that the likes of Jerome Powell, US Federal Reserve chairman have equated it to. It will be a few more years before that can happen apparently.
Perhaps this also serves as a challenge to tech entrepreneurs to create to cryptocurrencies or digital assets that are immune to global crises. In the meantime, cryptocurrency holders will have to contend with the market volatility and the manipulation that is thought to be widespread in this space.